By Jennifer Van Brunt


The biotechnology sector has continued to maintain a high public profile over the last month or so. Barely a day passes that there isn't some biotech-related event that manages to grab at least one headline or an interview on CNBC — whether it be the tangible potential of new biotherapies for changing the way that medicine views and treats cancer, or the realization that biotechnology has already altered the face of modern agricultural practice.

Yet the heightened awareness of the power of biotechnology to transform the future of healthcare and agriculture — as well as the realization that the companies developing and exploiting these various technologies have already made substantial progress towards that end — has done little to boost the performance of the biotech stocks. In fact, investors have not flocked to biotech issues. They have not backed new stock offerings with enthusiasm. And they have continued to buy and sell individual stocks for short-term profits rather than long-term gains.

So, even now, the sector continues to underperform the market as a whole. Analysts who favor this sector continue to stress the fact that the basic underpinnings are stronger than ever. But while individual companies in the biotech sector have made substantial progress in product development, they are still on the whole under-appreciated by the investment community. The perception of inherent value is apparently more than offset by the perception of intrinsic risk. Biotech stocks, after all, are infamous for their volatility — with good reason. The chances of getting in on a stock that quadruples its price in a day are far less than being stuck with one that drops 75 percent of its market capitalization in as little time.

Thus, though industry observers and analysts alike reason that it is high time for a significant rally in the biotech stocks, there are still no signs that this phenomenon is imminent. In fact, to the contrary, the stocks as a group are doing less well now than they did even a month ago. For instance, the Nasdaq Biotech Index, a market-value-weighted index that currently includes 136 Nasdaq-listed biotech and biotech-related stocks, peaked on May 8, about five days after the New York Times article on Rockville, Md.-based EntreMed Inc.'s two anticancer agents that ignited the media's month-long biotech binge. Even then, at a value of 336.58, the Nasdaq Biotech Index was up only 11 percent from its 1997 closing value of 303.10. Since that high point, the Nasdaq Biotech Index has slid downhill, closing on June 3 at 312.94, a mere 3 percent above its Dec. 31, 1997, value.

By a different measure — the BioWorld Stock Indicator, which calculates the average percent change in price for 309 biotech and biotech-related stocks — the picture is no prettier. Since the peak on May 8, when the stocks were trading an average of 11 percent above their 1997 closing prices, they have dropped off precipitously, closing on May 29 an average of only about 5 percent above the Dec. 31, 1997, price. (See the graphs on p. 10 for details of the stock performance year-to-date, as measured by both methods.)

Financing Trends

Public financing of biotech stock issues has also lagged this year. Through the end of May there have been a total of 12 initial public offerings (IPOs), which together have raised about $395 million. Compare these figures with the same time frame in 1997, and they seem encouraging. But in comparison to 1996, they look dismal.

Of the 12 IPOs completed so far in 1998, five have been conducted overseas (Oxford Asymmetry International plc, Oxford GlycoSciences plc and Quadrant Healthcare plc in London, Karo Bio AB in Stockholm and Cerep SA in Paris) and one has been international (Transgene SA, in Paris and New York).

In the first five months of 1996, however, 26 biotech and biotech-related companies completed IPOs, for total gross proceeds of $797 million. Of those, two (Phytopharm plc and Vanguard Medica Group plc) were placed on the London Stock Exchange; the rest were sold in U.S. markets. And in 1997 there were only seven IPOs in the first five months of the year, which garnered slightly more than $260 million in gross proceeds. Of those, only one (Cambridge Antibody Technology Group plc, in London) took place in foreign markets.

Though the IPO market looks slightly better than it did last year at this time, the market for follow-on stock offerings is all but dry. Between January and May of 1998, only five biotech and biotech-related companies completed follow-on offerings, grossing a total of $240 million as a result. All of these offerings were in U.S. markets. In 1996 — which was a banner year in almost all respects — there were 34 follow-on offerings in the same time period, which gleaned a combined $1.76 billion in proceeds. Several of those stock offerings were international or occurred in non-U.S. markets. In 1997, there were 11 follow-on stock offerings between January and May, for a total combined haul of $723 million. One of those offerings was international; the other occurred in Paris.

Though U.S.-based investment in biotech stocks might be off from its former highs, the rest of the world seems to be just warming up.

In 1998 to date, biotech stock offerings (both initial and follow-on) have garnered $636 million combined for 17 companies — with five offerings raising money from European and Scandinavian investors and one from an international assemblage. That means 29 percent of the public financing this year has come from non-U.S. sources.

In 1997, about 17 percent of the financing was supplied by non-U.S. investors: Eighteen companies raised $985 million from stock offerings between January and May — but only two of them were financed in Europe and one drew from international sources.

And in 1996 — the year to end all years — a total of 60 public offerings of biotech stock were completed by the last day of May, reaping combined proceeds of $2.56 billion. Only 10 percent of those offerings were not wholly based in the U.S.

It's already become apparent over the last year or so that venture capitalists in Europe and Canada — as well as other parts of the globe — have taken a strong stance on biotech investing. In stride with government initiatives to support fledgling national biotech industries, venture capitalists are pouring money into start-ups based in Germany, Sweden, Canada, France, Denmark, the U.K. and elsewhere. But now it appears that foreign investors are supporting the public biotech markets, as well. Many of those stock markets — Paris' Le Nouveau Marche and Easdaq, for instance — are themselves start-ups. But not for long.